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The Pros and Cons of Financing Options

A 2015 survey found that nearly half of small employers (with fewer than 500 employees) applied for credit in the previous 12 months. Even though the credit market has become friendlier overall, small companies still have a more difficult time getting approved for bank loans than larger businesses.1

Here are some common types of financing that might be available to help small businesses expand, pursue new opportunities, or cover operating expenses.

Bank loans. Many financial institutions restrict lending to the most creditworthy businesses, and even qualified owners may need to contact many banks before finding one that is willing to offer financing. New or fast-growing small businesses — even healthy ones with good prospects — are often rejected. Banks often require significant collateral and documentation of stable profits.

On the other hand, improving property values could allow some business owners to tap home equity to help secure business loans, cash-out mortgage refinances, or lines of credit.

SBA loans. The U.S. Small Business Administration guaranteed more than $28.9 billion in loans issued by participating banks in fiscal year 2016.2 The program often makes it easier to obtain financing and may offer more competitive terms and longer repayment periods. However, SBA loans also require “worthwhile” collateral, and it can take several months for qualified applicants to complete the process (through a local bank or online) and receive the funds.

Fast cash. A newer crop of lenders that use digital technology to approve smaller, short-term loans can sometimes be used to access cash quickly, often charging very high interest rates and fees.3 Some loans may be backed by business assets such as securities, equipment, inventory, and accounts receivable.

Credit cards. Business accounts often charge higher interest rates and offer fewer financial protections than personal accounts. Using a business credit card responsibly, however, is one way that a new business could help establish the positive credit history it might need to obtain larger bank loans in the future.

If you are thinking about borrowing funds to operate or grow your business, be sure to do plenty of research and weigh your options carefully.

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